The foundation of any successful budget starts with understanding where you stand financially. Here’s a step-by-step approach to helping to build and maintain a budget that works.
Most of us think that being on a budget is only needed when money is super tight. But that is far from the truth. Every business has a budget to control costs. Think of your personal finances more like your own personal business. Developing and maintaining an effective budget no matter what your income, is one of the most valuable things you can do for retirement wellbeing.
Building a budget is an important part of basic financial wellness, but many people don’t know how to get started. Budgeting is a simple strategy that can have a big effect on financial behaviors and habits. Which, in turn, can affect the success of planning for retirement or being able to meet emergency expenses.
An organized budget can:
* Empower you to make well-informed spending choices and take proactive steps toward financial goals.
* Redirect funds toward important financial milestones, such as paying down debt or boosting savings.
* Gives a sense of control over your money, which can help reduce stress and build greater financial confidence.
* Knowing where you are at all times, will remove guilt when you splurge on things like entertainment and hobbies.
1. The buckets system
If you own a business, you would not mix the money. You have accounts for the business and then you pay yourself. You can use the same approach, even if you are an employee. Checking accounts are free. Keep a master account to receive your income, and distribute to different budget buckets.
2. List the money coming in
List your guaranteed income streams, such as salaries, pensions, Social Security and annuities, as well as any variable sources like investments or part-time work.
3. List the money going out
For two to three months, keep a log of fixed expenses and variable expenses.
Fixed expenses = Bills that are typically the same every month, like a mortgage, car payment, or utilities.
Variable expenses = These are items that may change month to month. Write down an average on the high side.
4. Look at the overall picture
Subtract the total expenses from the monthly take-home pay to show what’s left to put toward other goals. If you discover their expenses add up to more than your income? Ask yourself questions like: “How do these expenses align with priorities?” and “What is really important to keep?”
A 50/30/20 approach can be a helpful way to visualize a budget. With this rule of thumb, will encourage you to put up to 50% of their after-tax income toward needs, 30% toward wants, and 20% toward wishes. Paychecks first, then Playchecks.
50% Needs: Essentials you can’t live without like food, shelter and clothing.
30% Wants: Things that are important but not necessary, like personal passions and hobbies.
20% Wishes: Savings for unplanned expenses and long-term dreams, like buying a second home, seeing the world, or gifts for family or charities.
5. Set and evaluate goals
Life changes such as job changes, medical emergencies, or major purchases can affect financial stability. It’s important to have regular reviews to revisit short, mid, and long-term goals to help make sure you are on track.
